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MGCR 382 (143)
John Saba (33)
Lecture 9

Lecture 9

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Department
Management Core
Course
MGCR 382
Professor
John Saba
Semester
Winter

Description
International Business Lecture 9Homework read chapter 9 page 258 to 267 and chapter 10 page 268 to 301 thProject due March 24Send assignment and documents to jesabahotmailcom Final Exam Tuesday April 12thChapter 9Formulation of National Trade Policies cont Objective 1 Present major arguments in favor of and against governmental intervention ininternational trade cont Industrylevel Arguments for Trade Protectionism Economist theory favors FREE TRADE It suggests that voluntary exchangetrade makes both parties to a transaction better offallocates resources most efficientlyAdam Smith argued that the welfare of a countryits citizens is best promoted by allowing selfinterested individuals regardless of where they reside to exchangetrade goods servicesassets as they see fitVERSUSPolitical practices favors TRADE PROTECTIONISMMany business people politicianspolicy makers believe that under certain circumstances deviations from free trade are appropriateThere are 5 arguments for trade protection eg against freetradeNote One of the 5 will be on the exam1National Defense argumentThe national security argument is that a country must protect its vital domestic industries with tariffs subsidies etc broadly interpreted to include not only defense equipment and armament production bus also food water and energy Also it must protect and be selfsufficient in the critical raw materials machinery and technology on which these vital domestic industries rely The key problem is that national securitydefense is too broadly interpreted and varies from country to country USA protects domestic producers in its merchant marine steel aerospace and advanced electronics industries and during the mid 1980s90s semiconductors on this basis Japan protects its domestic rice producers on this basisThe vulnerability of Japans supply lines was demonstrated by the extensive damage done to its merchant marine fleet by allied submarines during WWII After the war Japan banned imports of rice to promote domestic selfsufficiency in the countrys dietary staple Criticisms of this argument1It is more efficient to subsidize defenserelated industries than to restrict trade with tariffs 2In time of peace vital mineral resources often can be purchased more cheaply from foreign suppliers and stockpiled domestically2Infant Industry argument It is the oldest argument 1791 US theorist Alexander Hamilton countriesToday This argument is mainly associated with protectionist policies of developingThis argument contends that for a free trade to be meaningful trading countries mostly developing should temporarily protect their infant ie new and emerging industries from the competition of more mature large and efficient firms in foreign developed countries Trade restrictions can be dropped later after these young firms have had breathing space and time to become efficient producers so that they can compete with foreign firms The determination of which industries deserve infant industry protection is often done on a political rather than an economic basis Firms workers and shareholders are not shy about using the infant industry argument to bolster support for import protection or export subsidies for their industries 3 Assumptions which must be satisfied for the infant industry arguments to be valida Market forces eg foreign competition do not allow for the development of a certain industry b The protection must be limited in time ie the trade barriers will eventually be removed c Long run The trade protection must enable the firms receiving it to experience falling costsEventually that initial higher costs and losses disappear as the industry becomes efficient and profitableGovernments like Japan have nurtured domestic industries that ultimately achieve an acquired advantage through protectionist economic developments After WWII Japan developed thriving industries in metal processing and fabrication of iron steel aluminum copper and zinc even though it lacks the raw ores neededJapan developed these industries byst1 Imposing no tariff on the imported raw ores required to produce the metal steel and aluminum products but imposing high tariffs on imported already processed metal products nd2As the Japanese metal fabrication industry matured Japan gradually removed the tariffs on the imported metal products since its domestic industry could now compete with foreign producers Criticism of this argumenta The protection of domestic manufactures often provides the infant with no incentive to ever grow up and remain inefficient with higher per unit production costsIt continues to be unable to compete in the world marketthExBrazil 19501980s built the worlds 10 largest auto industry behind tariff barriers and quotas Late 1980s These barriers were removed and foreign imports soared and the Brazilian auto industry faced the reality that it was one of the worlds most inefficient after 30 years of protection
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